RE SFA (HK) LTD

HCMP 1190/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1190 OF 2009

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REASONS  FOR  JUDGMENT

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1.  This is a petition for confirmation of the reduction of share capital of SFA (HK) Ltd 三發機電有限公司 (“the Company”).

2.  The Company was incorporated in Hong Kong on 28 October 2002.  Its present share capital is HK$6,250,000 divided into 6,250,000 shares of HK$1 each, all of which have been issued and were paid up.  The present shareholders are SFA Eng. Corp. holding 6,249,999 shares and SM Tech holding the remaining share.

3.  Since 2004, the Company has no business activity save for its investment holding in a company incorporated in the People's Republic of China known as三發機電(深圳)有限公司 (“SFA (Shenzhen) Ltd”). 

4.  There is provision in the articles of association that the Company may by special resolution reduce its share capital in any manner and with, and subject to, any incident authorised, and consent required, by law.

5.  By a written resolution of the Company duly signed by all shareholders on 15 June 2009, a special resolution was passed by which the capital is to be reduced from HK$6,250,000 divided into 6,250,000 shares of HK$1 each to HK$ 4,750,000 divided into 4,750,000 shares of HK$1 each, and that such reduction be effected by cancelling 142,207 shares of HK$1 each all registered in the name of SFA Eng. Corp., being capital that has been lost or is unrepresented by available assets, and by further cancelling 1,357,793 shares of HK$1 each all registered in the name of SFA Eng. Corp. by repaying the paid-up capital of the said 1,357,793 shares to the holder thereof to the extent of HK$1 per share, being capital which is in excess of the wants of the Company.

6.  The major purpose of the formation of the Company in October 2002 was to act as the vehicle of its shareholders, which were engaged in the production and trade of factory automation and manufacturing system and LCD displays in Korea, to establish and invest in a company in the People's Republic of China for promoting the sales of the products of the Company's shareholders and providing maintenance service there, and to reap the special government incentives available only to investors from Hong Kong.

7.  On 2 December 2002, SFA (Shenzhen) Ltd was incorporated in Shenzhen with the Company as sole shareholder, with the registered capital of HK$4,400,000.  This was fully paid up by the Company by means of the existing share capital of the Company of HK$6,250,000.  It was originally intended that the bulk of the remaining share capital of the Company in the sum of HK$1,850,000 (the “Remaining Capital”) would be reserved for the Company to finance any future expansion of SFA (Shenzhen) Ltd by injection of capital into the latter.

8.  Since 2 December 2002, SFA (Shenzhen) Ltd has been able to operate its business by applying its own capital without the need for further injection of capital.  However, SFA (Shenzhen) Ltd has not expanded its business as originally envisaged.  Hence, the Company has kept the Remaining Capital.  Since October 2002, only a small portion of the Remaining Capital was used to defray its own administrative expenses.

9.  Recently, the shareholders of the Company decided that they would not seek any further expansion of the business of SFA (Shenzhen) Ltd.  Rather, they intended the bulk of the Remaining Capital be returned to them for other use.  As mentioned earlier, since the Company has no other business apart from its investment in SFA (Shenzhen) Ltd, it would only require a small portion of the remaining share capital for meeting its administrative expenses and liabilities.  This formed one of the reasons for the proposed reduction of capital.

10.  Further, as at 31 December 2008, the Company suffered accumulated losses to the extent of HK$142,207, which were mainly attributable to the administrative expenses from 2002 onwards.  The losses have depleted a portion of the share capital, leaving a sum of HK$6,107,793, of which HK$1,718,967 was cash or cash equivalents.  The directors believe that part of the paid-up capital of the Company which has been lost and is no longer represented by available assets should also be written off and cancelled.

11.  Given that the Company has no other business apart from its investment in SFA (Shenzhen) Ltd and the only income was the interest and exchange gain generated from its remaining share capital in cash, which were on average less than HK$10,000 a year, the Company expected that the annual income to be generated by such an income source could not even cover the yearly administrative expenses to be incurred, let alone the accumulated losses.  Hence, the accumulated losses should be regarded as a permanent deficit and depletion of the share capital.

12.  Prior to the passing of the special resolution, there were net assets in the balance sheet which on 31 December 2008 stood at HK$6,107,793.

13.  The proposed reduction of capital does not involve the diminution of any liability in respect of unpaid capital.

14.  The Company is a solvent company and it would still be solvent after the proposed reduction of capital.  Even with the proposed return of HK$1,357,793 to SFA Eng. Corp. upon cancellation of 1,357,793 shares, the Company should still be left with sufficient cash to pay all its liabilities in the foreseeable future.

15.  As at 31 December 2008, the liability of the Company was in the sum of HK$18,300, owed in respect of audit and secretarial services provided.  This liability has since been reduced to nil.  In any event, these creditors, whose professional fees have been paid, have been informed of the proposed reduction of capital and they have no objection to the same.

16.  At the hearing of the summons for directions on 21 July 2009, it was ordered that the provisions in section 59(2) of the Companies Ordinance, Cap. 32 shall not apply as regards any class of creditors of the Company and that the settlement of a list of creditors be dispensed with.  Directions for the advertisement of a notice of the presentation of the petition have been complied with.

17.  There is no question that the shareholders were not treated equitably in the proposed reduction.  The proposed reduction is for a discernible purpose and I am satisfied the interests of creditors would be sufficiently safeguarded.  I have therefore confirmed the reduction of capital and made an order in terms of the draft submitted as amended.